UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ____________
Commission file number 001-13913
WADDELL & REED FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0261715
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6300 LAMAR AVENUE
OVERLAND PARK, KANSAS
66202
(Address of principal executive offices)
(Zip Code)
(913) 236-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____
Shares outstanding of each of the registrant's classes of
common stock as of March 31, 2000:
CLASS OUTSTANDING AS OF MARCH 31, 2000*
- ------------------------------------- ---------------------------------
Class A Common stock, $.01 par value 27,756,610
Class B Common stock, $.01 par value 26,984,947
* The number of Class A and Class B shares are 41,633,725 and 40,476,188,
respectively after taking into account the 3-for-2 stock split effectuated
on April 7, 2000.
WADDELL & REED FINANCIAL, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 2000
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets at March 31, 2000 and December 31,
1999 3
Consolidated Statements of Operations for the three months ended
March 31, 2000 and March 31, 1999 4
Consolidated Statements of Comprehensive Income for the three
months ended March 31, 2000 and March 31, 1999 5
Consolidated Statements of Changes in Stockholders' Equity for
the three months ended March 31, 2000 6
Consolidated Statements of Cash Flows for the three months ended
March 31, 2000 and March 31, 1999 7
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Part II. Other Information
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 19
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
==================================================================================================
March 31, December 31,
2000 1999
ASSETS (unaudited)
- --------------------------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 89,259 60,977
Investment securities, available-for-sale 61,047 90,245
Receivables:
United funds and W&R funds 11,596 7,597
Customers and other 36,321 19,541
Deferred income taxes 0 37
Prepaid expenses and other current assets 4,626 7,111
- --------------------------------------------------------------------------------------------------
Total current assets 202,849 185,508
Property and equipment, net 33,614 27,633
Deferred sales commissions, net 5,020 1,851
Goodwill (net of accumulated amortization of
$27,422 and $26,493) 171,414 112,994
Deferred income taxes 560 5,665
Other assets 2,285 1,422
- --------------------------------------------------------------------------------------------------
Total assets $ 415,742 335,073
==================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------
Liabilities:
Current liabilities:
Accounts payable $ 51,491 34,002
Accrued sales force compensation 19,179 14,578
Short term notes payable 220,200 125,307
Income taxes payable 25,672 8,284
Deferred income taxes 13 0
Other current liabilities 21,761 16,456
- --------------------------------------------------------------------------------------------------
Total current liabilities 338,316 198,627
Accrued pensions and post-retirement costs 10,966 10,103
Other liabilities 152 0
- --------------------------------------------------------------------------------------------------
Total liabilities 349,434 208,730
- --------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock (See table below) 997 997
Additional paid-in capital 237,648 238,434
Retained earnings 125,639 97,129
Deferred compensation (10,889) (11,246)
Treasury stock (See table below) (286,262) (198,360)
Accumulated other comprehensive income (825) (611)
- --------------------------------------------------------------------------------------------------
Total stockholders' equity 66,308 126,343
- --------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 415,742 335,073
==================================================================================================
Common stock
($.01 par value) 2000 1999
--------------- ---- ----
Class A Class B Class A Class B
------- ------- ------- -------
Authorized................ 225,000,000 150,000,000 225,000,000 150,000,000
Issued.................... 48,213,261 51,487,500 48,213,261 51,487,500
Outstanding............... 41,634,915 40,477,420 44,478,318 41,971,870
Treasury Stock............ 6,578,346 11,010,080 3,734,943 9,515,630
See accompanying notes to unaudited consolidated financial statements.
3
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited in thousands, except for per share data)
========================================================================================================
For the three months
ended March 31,
2000 1999
- --------------------------------------------------------------------------------------------------------
Revenue:
Investment management fees $ 63,805 $ 37,316
Underwriting and distribution fees: 45,481 30,532
Shareholder service fees 11,294 9,702
Investment and other revenue 4,162 2,923
- --------------------------------------------------------------------------------------------------------
Total revenue 124,742 80,473
- --------------------------------------------------------------------------------------------------------
Expenses:
Underwriting and distribution 41,396 29,812
Compensation and related costs 14,001 9,137
General and administrative 6,612 4,051
Depreciation 631 533
Interest expense 2,499 863
Amortization of goodwill 929 726
- --------------------------------------------------------------------------------------------------------
Total expenses 66,068 45,122
- --------------------------------------------------------------------------------------------------------
Income before provision for income taxes 58,674 35,351
Provision for income taxes 22,548 13,368
- --------------------------------------------------------------------------------------------------------
Net income $ 36,126 $ 21,983
========================================================================================================
Net income per share:
- Basic $ 0.43 $ 0.24
- Diluted $ 0.41 $ 0.23
========================================================================================================
Weighted average shares outstanding:
- Basic 84,713 92,957
- Diluted 87,213 94,811
========================================================================================================
Dividends declared per common share $ 0.0884 $ 0.0884
See accompanying notes to consolidated financial statements.
4
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited in thousands)
=====================================================================================================
For the three months
ended March 31,
2000 1999
- -----------------------------------------------------------------------------------------------------
Net income $ 36,126 $ 21,983
Other comprehensive income:
Net unrealized appreciation (depreciation) of
investments during the period, net of income 1,092 (328)
taxes of $686 and $(204)
Reclassification adjustment for amounts included in
net income, net of income taxes of $(818) and $(193) (1,306) (308)
- -----------------------------------------------------------------------------------------------------
Comprehensive Income $ 35,912 $ 21,347
=====================================================================================================
See accompanying notes to unaudited consolidated financial statements.
5
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Statement of Changes in Stockholders' Equity
For the Three Months Ended March 31, 2000
(Unaudited in thousands)
====================================================================================================================================
Accumulated
Additional other Total
Common Stock paid-in Retained Deferred Treasury comprehensive stockholders'
Shares Amount capital earnings Compensation Stock income equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 99,701 $ 997 238,434 97,129 (11,246) (198,360) (611) 126,343
Net income 0 0 0 36,126 0 0 0 36,126
Recognition of deferred compensation 0 0 0 0 357 0 0 357
Dividends paid 0 0 0 (7,616) 0 0 0 (7,616)
Exercise of stock options, net 0 0 (786) 0 0 3,095 0 2,309
Treasury stock purchases 0 0 0 0 0 (90,997) 0 (90,997)
Unrealized loss on investment
securities 0 0 0 0 0 0 (214) (214)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2000 99,701 $ 997 237,648 125,639 (10,889) (286,262) (825) 66,308
====================================================================================================================================
See accompanying notes to unaudited consolidated financial statements.
6
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited in thousands)
==========================================================================================
For the three months
ended March 31,
2000 1999
- ------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 36,126 $ 21,983
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,577 1,259
Recognition of deferred compensation 357 339
(Gain)/Loss on sale of investments (2,096) 0
Loss on sale and retirement of fixed assets 12 0
Capital gains and dividends reinvested (43) (28)
Deferred income taxes 5,352 736
Changes in assets and liabilities
(net of acquisition):
Receivables from funds (3,999) (2,271)
Other receivables (9,624) 841
Other assets (1,112) (1,646)
Accounts payable 17,453 12,374
Other liabilities 19,762 7,234
- ------------------------------------------------------------------------------------------
Net cash provided by operating activities 63,765 40,821
- ------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to investment securities (6,833) (2,247)
Proceeds from sale of investment securities 37,761 0
Proceeds from maturity of investment securities 502 74
Additions of property and equipment (5,604) (1,635)
Investment in real estate 0 462
Acquisition of Legend (net of $1,113 cash acquired) (60,005) 0
- ------------------------------------------------------------------------------------------
Net cash used in investing activities (34,179) (3,346)
- ------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings on credit facility 95,000 40,000
Cash dividends (7,616) (8,324)
Purchase of treasury stock (90,997) (35,484)
Exercise of stock options 2,309 34
- ------------------------------------------------------------------------------------------
Net cash used in financing activities (1,304) (3,774)
- ------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 28,282 33,701
Cash and cash equivalents at beginning of period 60,977 30,180
- ------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 89,259 $ 63,881
==========================================================================================
See accompanying notes to unaudited consolidated financial statements.
7
WADDELL & REED FINANCIAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES AND BASIS OF PRESENTATION:
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Waddell & Reed Financial, Inc. and subsidiaries ("Company") derive their
revenue primarily from investment management, administration, distribution and
related services provided to the United mutual funds ("United"), Waddell & Reed
mutual funds ("W&R"), Target/United mutual funds ("Target") and institutional
accounts in the United States.
BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments consisting of normal recurring
adjustments, necessary to present fairly the results of its operations and its
cash flows for the periods ended March 31, 2000 and 1999 and its financial
position at March 31, 2000. These financial statements should be read in
conjunction with the Company's audited financial statements for the year ended
December 31, 1999, from which the accompanying balance sheet as of December 31,
1999 was derived. The operating results and cash flows for the periods ended
March 31, 2000 and 1999 are not necessarily indicative of the results that will
be achieved in future periods.
STOCK SPLIT
On February 23, 2000, the Company declared a three-for-two stock split
on the Company's Class A and Class B common stock payable on April 7, 2000 to
stockholders of record as of March 17, 2000. All per share and shares
outstanding data in the consolidated financial statements and related notes
have been restated to reflect the stock split for all periods presented.
ACQUISITION OF SUBSIDIARY
On March 31, 2000, the Company completed its acquisition of The
Legend Group, a privately-held mutual fund distribution and retirement
planning company based in Palm Beach Gardens, Florida. The acquisition has
been accounted for as a purchase and, accordingly, the results of The Legend
Group will be included with those of the Company commencing on the date of
acquisition. The purchase price of approximately $61,118,000 million,
including direct costs, has been allocated to the assets acquired and
liabilities assumed resulting in goodwill of approximately $59,348,000
million, which will be amortized on a straight line basis over 25 years.
8
The purchase agreement provides for additional purchase price payments
contingent upon the achievement by The Legend Group of specified earnings levels
over the next three years. These contingent payments could aggregate to as much
as $14.0 million.
A summary of the net assets acquired is as follows (in thousands):
Assets acquired
Cash and cash equivalents $ 1,113
Accounts receivable 7,156
Goodwill 59,348
Other assets 1,989
---------
Total 69,606
Liabilities assumed 8,488
---------
Total purchase price $ 61,118
=========
The table below presents supplemental pro forma information for the first
quarters of 2000 and 1999 as if The Legend Group acquisition were made on
January 1, 1999 (instead of the actual closing date, March 31, 2000) at the
same purchase price, based on estimates and assumptions considered
appropriate:
For the Three Months Ended
----------------------------------
March 2000 March 1999
---------- ----------
Revenues $ 136,425 $ 89,315
Net Income 36,392 21,953
Net Income per common share
Basic $0.43 $ 0.24
Diluted $0.42 $ 0.23
LIQUIDITY AND CAPITAL
On February 23, 2000, the Company declared a dividend payable on May 1,
2000 in the amount of $.0884 per share to stockholders of record as of April
17, 2000. The total dividend paid was $7,281,000 million.
For the three month period ended March 31, 2000, the Company repurchased
4,524,300 Class A and Class B common shares at an average price of $20.09 per
share, on a post-split basis.
The Company has a $220 million, 364-Day revolving credit facility at an
interest rate of LIBOR plus .625%. As of March 31, 2000, the outstanding
balance on this facility was $220 million. During the quarter, the Company
had net borrowings of $95 million. The primary uses of the borrowed funds
were to repurchase stock under the stock repurchase program and to acquire
The Legend Group.
EARNINGS PER SHARE
Basic earnings per share for the 2000 and 1999 periods are based on the
average number of
9
shares outstanding for the periods ended March 31, 2000 and 1999,
respectively. Diluted earnings per share for these periods also includes the
dilutive impact of stock options.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CERTAIN STATEMENTS CONTAINED IN THIS QUARTERLY REPORT ON FORM 10-Q
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933, AS AMENDED AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, INCLUDING STATEMENTS REGARDING THE
COMPANY'S EXPECTATIONS, HOPES, BELIEFS, INTENTIONS OR STRATEGIES REGARDING
THE FUTURE. ALL STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACT INCLUDED
IN THIS FORM 10-Q REGARDING THE COMPANY'S FINANCIAL POSITION, BUSINESS
STRATEGY AND OTHER PLANS AND OBJECTIVES FOR FUTURE OPERATIONS ARE
FORWARD-LOOKING STATEMENTS. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS
FORM 10-Q ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE
HEREOF, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE SUCH FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR
OTHERWISE. ALTHOUGH THE COMPANY BELIEVES THAT THE ASSUMPTIONS AND
EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT
CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT
OR THAT THE COMPANY WILL TAKE ANY ACTIONS THAT MAY PRESENTLY BE PLANNED AND
NEITHER THE COMPANY NOR ANY OTHER PERSON WILL BE RESPONSIBLE FOR THE ACCURACY
OR COMPLETENESS OF ANY SUCH FORWARD-LOOKING STATEMENTS. CERTAIN IMPORTANT
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE
COMPANY'S EXPECTATIONS ARE DISCLOSED IN THE "RISK FACTORS" SECTION OF THE
COMPANY'S FORM 10-K ANNUAL REPORT, WHICH INCLUDE, WITHOUT LIMITATION, THE
ADVERSE EFFECT FROM A DECLINE IN SECURITIES MARKETS OR IF THE COMPANY'S
PRODUCTS' PERFORMANCE DECLINES, FAILURE TO RENEW INVESTMENT MANAGEMENT
AGREEMENTS, COMPETITION, CHANGES IN GOVERNMENT REGULATION, AVAILABILITY AND
TERMS OF CAPITAL, YEAR 2000 UNCERTAINTIES, ACQUISITION STRATEGY OR
IMPLEMENTATION, A RISK THAT THE EXPECTED PROFITS FROM THE MUTUAL FUND PRODUCT
RESTRUCTURING AND THIRD-PARTY DISTRIBUTION MAY NOT COME TO FRUITION AND OTHER
RISKS AS SET OUT IN THE REPORTS FILED BY THE COMPANY WITH THE SECURITIES AND
EXCHANGE COMMISSION. SHOULD ONE OR MORE OF THESE RISKS MATERIALIZE OR SHOULD
THE UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE FORECASTED OR EXPECTED. ALL SUBSEQUENT WRITTEN OR ORAL
FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON
ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY SUCH FACTORS. UPDATED
INFORMATION WILL BE PERIODICALLY PROVIDED BY THE COMPANY AS REQUIRED BY THE
SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED.
OVERVIEW
The Company derives its revenues primarily from providing investment
management, distribution and administrative services to the United, W&R and
Target/United funds, as well as to institutional and privately managed
accounts. Investment management fees, the Company's most substantial source
of revenue, are based on the amount of assets under management and the
management fee rates charged and are affected by sales levels, financial
market conditions, redemptions and the composition of assets. Underwriting
and distribution revenues consist of sales charges and commissions derived
from the sales of investment and insurance products and distribution fees.
The products sold have various sales charge structures and the revenues
received
10
from sales of products vary based on the type and amount sold. Rule
12b-1 distribution and service fees earned for distributing shares of certain
mutual funds are based upon a percentage of assets and fluctuate based on
sales, redemptions, and financial market conditions. Service fees include
transfer agency fees, custodian fees for retirement plan accounts and
portfolio accounting fees.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2000 AS COMPARED WITH
THREE MONTHS ENDED MARCH 31, 1999
First quarter 2000 net income was $36.1 million or $.41 per share on a
diluted basis, compared with net income of $22.0 million or $.23 per share
for the prior year's first quarter, as adjusted for the three-for-two stock
split announced March 7, 2000. Net income per share increased 78.3% when
compared with net income per share for the same period in 1999. During the
first quarter of 2000, $2.1 million of pretax gains were realized from the
sales of marketable securities. Excluding these gains, first quarter net
income would have been $34.9 million or $0.40 per share on a diluted basis, a
73.9% increase over the same period in 1999. Operating revenues, excluding
investment and other income for the first quarter of 2000, were $120.6
million, up 55.5% over last year's first quarter.
Management fee revenues increased $26.5 million or 71.0% from 1999's
first quarter. Mutual fund management fees contributed $21.2 million or 80%
of the increase. Average mutual fund assets under management increased $8.8
billion or 35.4% as a result of investment performance and net sales. The
restructuring of the funds management fee arrangements implemented in July
1999, combined with greater composition of assets in funds with higher
management fee rates, pushed the aggregate average mutual fund management fee
rate to 67.9 basis points for the first quarter of 2000, up from 58.2 basis
points for last year's first quarter. Net sales and reinvested income also
provided growth. Management fee revenues from institutional and
privately-managed accounts increased $5.1 million to $6.9 million. Assets
managed by Austin, Calvert & Flavin, Inc. ("ACF"), acquired in August of
1999, contributed $2.8 million of this increase. The addition of
institutional growth equity accounts during 1999 and 2000 with higher
management fee rates was also a factor in the increase in revenues.
Total assets under management at March 31, 2000 totaling $41.5 billion
were composed of $35.4 billion in mutual fund assets and $6.1 billion in
institutional and private account assets. Mutual fund assets were up 40.3%
from the first quarter of 1999, while institutional and private account
assets were up 91.6% for the same period. Total assets under management were
up 46.1% from March 31, 1999.
Retail mutual fund net sales were $140.4 million for the first quarter
of 2000 compared to net redemptions of $18.5 million for the first quarter of
1999. The redemption rates on retail mutual funds were 7.7% and 8.8% for the
first quarters ended 2000 and 1999, respectively. Institutional net sales
were $120.6 million for the first quarter of 2000 compared to net redemptions
of $62.9 million for 1999's first quarter.
Underwriting and distribution revenues were $45.5 million, 49.0% higher
than last year's first quarter. Retail investment sales growth of 54.8% year
over year, (see table below) and productivity gains fueled this growth.
Commission revenue from front-end load mutual funds (United Class A) was
$20.6 million for the quarter, $5.3 million or 34.1% higher than the same
period last year. Commissions from variable annuity sales were $11.5 million,
$4.6 million or
11
67.4% higher than last year's first quarter. Higher revenues also resulted
from the previously announced enhanced commission arrangement on variable
annuity products, effective January 1, 2000. These additional commissions
added $1.7 million to first quarter revenues.
12
Investment Sales ($ in thousands)
1Q00 1Q99 % CHANGE
---- ---- --------
United Funds
Class A $ 456,254 $341,254 33.7%
Class B 111,219 -- N/A
Class C 25,795 -- N/A
-------- --------
Total United Funds 593,268 341,254 73.8
Waddell & Reed Funds
Class B -- 92,758 N/A
Class C 72,107 -- N/A
-------- --------
Total Waddell & Reed Funds 72,107 92,758 -22.3
Target/United funds (variable products) 155,380 96,168 61.6
-------- --------
Total Retail 820,755 530,180 54.8
Institutional 317,537 255,020 24.5
-------- --------
Total $1,138,292 $785,200 45.0
========== ========
Revenues from back-end load (Class B and Class C shares) come primarily
from asset-based 12b-1 fees and to a lesser extent from sales charges paid on
early share redemptions (contingent deferred sales charges). Revenues from
back-end load funds were $4.3 million, up $1.8 million or 74%, in line with
the growth of Class B and Class C assets under management.
Sales force productivity, as measured by retail investment sales per
advisor, increased 43.6% from $225 thousand in the first quarter of 1999 to
$323 thousand for 2000's first quarter. First quarter sales productivity for
financial advisors with two years or more of tenure increased by $125
thousand or 37.3% from the first quarter of 1999. The total number of
financial advisors increased to 2,522, up 164 or 7.0% from last year's first
quarter.
Shareholder service fees from transfer agency, custodian, and
accounting services were $11.3 million for the first quarter of 2000, up
16.4% from the first quarter of last year. The increase was due primarily to
the 250 thousand increase in the average number of customer accounts,
representing a 15.9% increase over the year before. The number of shareholder
accounts was 1.82 million at March 31, 2000, compared to 1.55 million at
March 31, 1999.
Investment and other revenue, which consists primarily of interest
income from investment securities included a gain on the sale of securities
of $2.1 million in the first quarter of 2000. Excluding this gain, Investment
and other income was $2.1 million for the quarter ended March 31, 2000, down
from $2.9 million for the prior year's first quarter, due primarily to lower
balances in investment securities.
Underwriting and distribution expenses, consisting of direct costs and
indirect costs increased $11.6 million or 38.9%, while underwriting and
distribution revenues increased 49.0%. This provided for a distribution
margin of 9.0% compared with 2.4% for last year's first quarter. The
distribution margin came in at the higher end of management's previously
announced 5% - 10% range due primarily to higher sales and productivity
growth.
13
Compensation and related costs increased $4.9 million or 53.2% from last
year's first quarter. Compensation related to ACF accounted for $1.0 million
of this increase. Performance based compensation increased by $1.5 million,
primarily as a result of superior relative performance of our mutual fund and
institutional accounts. A 23% increase in personnel and normal annual raises
accounted for the remaining increase. The Company continued to invest in
investment management, client service, and support personnel.
General and administrative expenses were $2.6 million higher due to a
variety of operating items. G&A costs of ACF were $0.3 million. Certain
information systems related costs were $0.7 million higher. Additional
factors contributing to the increase include higher costs for mutual fund
prospectuses, and shareholder communications brochures, consulting, and audit
services and space rent for our expanding operations.
Interest expense and related facility costs on the Company's $220.0
million credit facility were $2.5 million compared to $0.9 million for last
year's first quarter. The average amount outstanding on the credit facility
was $150.2 million and $59.1 million for the first quarters 2000 and 1999,
respectively. The average interest rate charged, excluding facility costs,
was 6.7% for the first quarter of 2000 compared with 5.4% for last year's
first quarter. The credit facility has been used to fund share repurchases
and acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and liquid marketable securities were $150.3
million at March 31, 2000, a decrease of $0.9 million from December 31, 1999.
Cash and cash equivalents included reserves of $24.1 million and $17.1
million for the benefit of customers in compliance with securities
regulations at March 31, 2000 and December 31, 1999, respectively.
Cash flow provided from operations was $63.8 million and $40.8 million
for the first quarter of 2000 and 1999, respectively. Cash flows used in
investing activities increased by $30.8 million during the first quarter of
2000 compared with the same period in the prior year. The increase was
attributed to cash used by the Company to acquire The Legend Group of $61.1
million, which was somewhat offset by the sale of investments securities of
$37.8 million during the period. Cash flows from financing activities during
the first quarter of 2000 included net inflows of $95 million provided by
additional borrowings on the Company's credit facility which were used to
fund stock repurchases and The Legend Group acquisition.
Management believes its available cash, marketable securities and
expected cash flow from operations will be sufficient to fund dividends,
obligations and operations as well as advance sales commissions and to meet
any other reasonably foreseeable cash needs. The $220 million credit
facility, expandable to $330 million, is also available for the Company's
use. The outstanding balance on the facility at March 31, 2000 was $220
million.
THE LEGEND GROUP ACQUISITION
On March 31, 2000, the Company completed its acquisition of The Legend
Group, a privately-held mutual fund distribution and retirement planning
company based in Palm Beach Gardens, Florida. Through its network of
approximately 300 financial advisors, The Legend Group serves employees of
school districts and other not-for-profit organizations nationwide.
14
The acquisition has been accounted for as a purchase and, accordingly,
the results of The Legend Group will be included with those of the Company
commencing with the date of acquisition. The purchase price of approximately
$61.1 million, including direct costs, has been allocated to the assets
acquired and liabilities assumed resulting in goodwill of approximately $59.3
million which will be amortized on a straight line basis over 25 years. The
acquisition agreement provides for additional purchase price payments based
upon the achievement by The Legend Group of specified earnings levels over
the next three years. These payments could aggregate as much as $14.0 million.
The Company will offer its United and Waddell & Reed families of mutual
funds through Legend's financial advisors beginning in May 2000. These
funds will be sold into Legend's various account types, including 403(b)
plans and asset allocation accounts.
STOCK SPLIT
On February 23, 2000, the Company declared a three-for-two stock split
on Waddell & Reed's Class A and Class B common stock payable to stockholders
of record as of March 17, 2000. The split entitled the stockholders of record
to receive one additional share for every two shares held on the record date,
along with cash for the value of fractional shares. Management believes that
over time the split will lead to a more liquid market for the Company's
shares.
STOCK REPURCHASE PROGRAM
The Company continued acquiring shares of its common stock by purchasing
3.0 million Class A and 1.5 million Class B shares (on a post stock split
basis) at an aggregate cost, including commissions, of $91.0 million during
the first quarter of 2000. The average price per share of these repurchases
was $20.09, on a post stock split basis.
THIRD-PARTY DISTRIBUTION
The Company intends to expand distribution into third-party channels
before the end of the year. The United Funds family will remain the Company's
proprietary fund family and will be sold only through Waddell & Reed and
Legend financial advisors. The Waddell & Reed Funds will be available for
sale through both Waddell & Reed financial advisors and third-party channels.
The Company is considering changing the names of its United Funds family and
its Waddell & Reed Funds family. In marketing the Waddell & Reed Funds
family, the Company will focus primarily on distribution environments that
provide significant opportunity for asset growth. These are likely to include
401(k) platforms, registered investment advisors and wrap programs. The
Company expects to begin selling into third-party environments by the fourth
quarter of 2000. These sales are not expected to be material to 2000
financial results, but should begin to have a meaningful impact in 2001.
15
ASSETS UNDER MANAGEMENT
(amounts in millions)
\
ENDING
1Q 00 1Q 99 % change 4Q 99 % change
--------------------- --------
Mutual Fund
Equity $31,186 $20,550 51.8% $27,523 13.3%
Fixed Income 3,289 3,944 -16.6 3,509 -6.3
Money Market 873 692 26.2 877 -0.5
---------- -------- -------
Total 35,348 25,186 40.3 31,909 10.8
Institutional and private accounts 6,132 3,201 91.6 5,393 13.7
--------- -------- -------
Total Assets Under Management $41,480 $28,387 46.1 $37,302 11.2
========= ======== =======
AVERAGE
1Q 00 1Q 99 % change
---------------------
Mutual Funds
Equity $29,270 $20,099 45.6%
Fixed Income 3,403 3,950 -13.8
Money Market 825 691 19.4
-------- --------
Total 33,498 24,740 35.4
Institutional and private accounts 5,722 3,176 80.2
--------- --------
Total Assets Under Management $39,220 $27,916 40.5
========= ========
OTHER ITEMS
1Q 00 1Q 99 % change
--------------------- --------
Retail Redemption Rate 7.68% 8.78%
Sales per advisor (000'S)
Total 323 225 43.6%
2 + Years * 460 335 37.3
0 to 2 Years ** 95 62 53.2
Other 164 102 60.8
Number of advisors
Total 2,522 2,358 7.0
2 + Years * 1,390 1,271 9.4
0 to 2 Years ** 1,132 1,087 4.1
Other 446 362 23.2
Number shareholder accounts 1,820,771 1,552,450 17.3
* Advisors licensed with the Company for two or more years.
** Advisors licensed with the Company for less than two years.
INFORMATION SYSTEMS AND YEAR 2000 READINESS
16
The Company believes its software programs and operating systems are
year 2000 compliant and ready for use beyond the year 2000.
The Company is not currently aware of any material year 2000 problem
relating to any of its material internal software programs or operating
systems. Its internal operation and business are also dependent upon the
computer-controlled systems of third parties such as our suppliers, customers
and other service providers. The Company believes that, absent a systemic
failure outside its control, such as a prolonged loss of electrical or
telecommunications service, year 2000 problems at third parties will not have
a material impact on its operations. The failure of the Company's internal
systems or the systems of third parties to be year 2000 ready could
temporarily prevent the Company from providing service to its customers and
could require the Company to devote significant resources to correct such
problems. The costs associated with remediating any year 2000 problems have
not, in the opinion of management, been material to date. Although the
Company does anticipate that these costs will be material in the future,
there can be no assurance that these costs will not be material.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since December 31, 1999, there has been no material change in the
information provided in Item 7A of the 1999 Form 10-K Annual Report.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Forward-Looking Statements
The Company desires to take advantage of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995 (the "1995 Act"). The
1995 Act provides a "safe harbor" for forward-looking statements to encourage
companies to provide information without fear of litigation so long as those
statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those projected. Although the
Company does not anticipate that it will make forward-looking statements as a
general policy, the Company will make forward-looking statements as required
by law or regulation, and from time to time may make such statements with
respect to management's estimation of the future operating results and
business of the Company.
The Company hereby incorporates into this report by reference to its
Form 10-K for the year ended December 31, 1999, the cautionary statements
found on pages 25-29 of such Form 10-K.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Purchase Agreement, dated as of February 28, 2000, by and among Waddell
& Reed Financial, Inc., Freemark Investment Management, Inc., Legend
Financial Corporation, Advisory Services Corporation, Performance
Management Group, Inc., Service
17
Management Advisory Corporation, The Legend Group, Inc., Philip C.
Restino, Restino Family Trust, 01/02/94 Trust FBO John J. Restino,
01/02/94 Trust FBO Robert R. Restino, Mark J. Spinello, Glenn T.
Ferris and David L. Phillips. Filed as Exhibit 2.1 on the Company's
Current Report on Form 8-K, dated March 31, 2000 and incorporated
herein by reference.
10.2 Amended and Restated 1998 Executive Deferred Compensation Stock Option
Plan.
10.3 Amended and Restated 1998 Stock Incentive Plan.
10.4 Letter Agreement Amending Principal Underwriting Agreement, dated as of
July 8, 1999, by and between the United Investors Life Insurance
Company and Waddell & Reed, Inc. effective January 1, 2000.
27 Financial Data Schedule.
(b) Reports on Form 8-K
A Form 8-K dated February 28, 2000 was filed to announce the proposed
acquisition of The Legend Group of Companies, a private mutual fund
distribution and retirement planning company based in Palm Beach Gardens,
Florida. No financial statements were required to be filed.
A Form 8-K dated March 7, 2000 was filed to announce a three-for-two stock
split effective April 7, 2000 for stockholders of record on March 17, 2000.
No financial statements were required to be filed.
A Form 8-K dated March 31, 2000 was filed to report the acquisition of The
Legend Group of Companies, a Palm Beach Gardens, Florida based private mutual
fund distribution and retirement planning company. Financial statements will
be filed by amendment within the required time frame.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, this 15th day of May, 2000.
WADDELL & REED FINANCIAL, INC.
By: /s/ John E. Sundeen, Jr.
-------------------------
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
By: /s/ D. Tyler Towery
-------------------------
Vice President and
Controller
(Principal Accounting Officer)
19